OSFI deposit proposal might harm alternative lenders

Current version of the proposal treats all transactions as if they invite equal risks

OSFI deposit proposal might harm alternative lenders

The draft regulatory changes presented by the Office of the Superintendent of Financial Institutions recently would compel banks to keep a larger volume of liquid assets in reserve and thus reduce the risk of collapse, The Globe and Mail reported earlier this month.

However, this move will likely harm competition in the space as such requirements would have a more pronounced impact on smaller institutions such as alternative lenders, observers argued.

National Bank analyst Jaeme Gloyn compared the effect of this rule revision on Equitable Bank and Home Capital Group. If the proposal is implemented as is, the institutions will suffer reduced earnings per share (for next year) of around 10% and 4%, respectively.

“Banks can deploy other strategies to offset the potential earnings and profitability drags,” Gloyn explained, noting that these can include adjusting mortgage or deposit interest rates as well as cutting costs.

The current version of the proposal also deems all digital banking activities as if they incur equivalent risks, which does not take into account possible case-to-case differences – differences that would only become starker as online transactions take up a greater share of the market.

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OSFI assistant superintendent Carolyn Rogers assured that the fiscal watchdog will take these concerns into account.

“That was a big focus of ... some of the feedback we got from the banks,” Rogers stated. “That’s the purpose of a consultation is to get that feedback and adjust based on that feedback.”

Moody’s Investors Service Inc. said that the OSFI’s proposal would be “credit positive” for Canadian banks, especially the Big Six.

“Although such higher liquidity will negatively impact profitability, on balance, we believe the positive improvements in liquidity and funding more than offset the profitability effect,” Moody’s noted.